Should You Pay Off Your Mortgage Early?

Have you ever compared the purchase price of your home with the amount you’ll actually end up spending to pay it off over the life of the mortgage? If you have, you’ll know the sobering realization that comes with seeing just how much your home will cost you, and the inevitable question that follows – should I pay off the mortgage now, so I don’t have to fork over all that interest?

It’s an exhilarating thought, freeing up so much extra cash. But when it comes down to it, whether you should actually pay off your mortgage early is dependent on many things – primarily, your overall financial situation, your attitude toward investment, your life stage and how you would make it happen.

Do the Math

From a purely mathematical perspective, most experts agree it is not a smart idea to pay off your mortgage early – especially if you have financed or refinanced your home relatively recently. Because federal interest rates have been historically low in recent years, your mortgage is likely the cheapest loan you’ll ever take out. By that logic, continuing to pay your mortgage monthly and investing the money you would have used to pay it off instead, is likely to net you a larger financial gain in the long run. While 30-year-fixed mortgage rates have been hovering around 4 percent since 2010, experts assume an average 7 percent return on money invested in the market – meaning you’re likely to make more if you invested excess funds than you would save by paying off your mortgage.

Mortgage Freedom

However, even the most pragmatic of financial advisors can’t deny the peace of mind that comes from having a paid-off place to live. When you’re not paying a significant percentage of your monthly income toward your mortgage, your cash flow increases and your fiscal responsibilities decrease. If you were ever laid off, have a medical emergency or run into another financial circumstance that made it difficult (or impossible) to pay the mortgage, you would have one less thing to worry about. If those financial circumstances became dire, your home would be an asset rather than a liability. The mental freedom that comes with that knowledge is priceless, and becomes increasingly so the older you are.

Retirement Advisor Wes Moss surveyed more than 1,350 retirees across the United States for his book You Can Retire Sooner Than You Think  – The 5 Money Secrets of the Happiest Retirees, and found “the happiest and most successful retirees had either eliminated or dramatically reduced their mortgage payment before pressing the retirement button.”

The Right Move For You

So how can you weigh the relative good deal of an inflation-proof, low-interest loan against the happiness and lightness that may result from ditching it? Here are four things to consider:

  1. How do the rest of your finances look? Are you maxing out your tax-free retirement accounts already? If not, do that before paying off your mortgage.
  2. What level of risk are you comfortable with in your investments? If you prefer to make less-aggressive investments that yield lower returns, you may see more benefit from paying off your mortgage than you would if you tend to make higher-return investments.  
  3. How old are you? The younger you are, the more likely you are to bounce back from a financial setback. If you’re nearing retirement age, the mental freedom that comes from a paid-off home may be worth more to you.
  4. How would you pay off your mortgage? If you would have to dip into your three-to-six months’ worth of emergency savings or retirement accounts to pay off your home, don’t do it.

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